2019 (6) TMI 1687 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on warranty expense provision, dismissing Revenue's appeal.

The Deputy Commissioner of Income Tax, Circle – 2 (1) (1), Ahmedabad Versus GMM Pfaulder Ltd.

The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs.68,61,000/- towards provision for warranty expenses, dismissing the Revenue's ... Disallowance towards provision for warranty expenses - eligible expenditure u/s 37(1) - HELD THAT:- The issue is no longer res integra and provision for warranty has been duly accepted as revenue expenditure by the Hon’ble Gujarat High Court in case of Pr.CIT vs. Hitachi Home & Life Solution (I) Ltd. [2018 (10) TMI 1817 - GUJARAT HIGH COURT] The provision for warranty expenses has been held to be allowable expenditure by the Hon’ble supreme Court in Rotork Controls India Pvt. Ltd. [2009 (5) TMI 16 - SUPREME COURT] as referred to and relied upon by the CIT(A) correctly - Decided against revenue. Issues Involved:1. Deletion of disallowance of Rs.68,61,000/- towards provision for warranty expenses claimed as revenue expenditure by the assessee.Issue-wise Detailed Analysis:1. Deletion of Disallowance of Rs.68,61,000/- towards Provision for Warranty Expenses:The Revenue's primary grievance concerns the deletion of the disallowance of Rs.68,61,000/- towards provision for warranty expenses claimed as revenue expenditure by the assessee. The Revenue argued that such warranty expenses are provisional in nature and lack a scientific basis, thus not qualifying as eligible expenditure under s.37(1) of the Income Tax Act, 1961. The Revenue contended that mere provision without showing crystallization of liability cannot be considered an allowable expenditure.On the other hand, the assessee argued that the provision for warranty expenses was made on a scientific basis, consistent with past experiences and in accordance with the warranty clause in the sales order. The assessee provided detailed calculations, which were reviewed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The provision for warranty was not only for potential claims by customers but also included maintenance services during the warranty period, which necessitated material, salary, travelling, and other expenses.The CIT(A) examined the issue thoroughly, noting that the provision was based on past experiences and consistently followed year after year. The CIT(A) referenced the Hon'ble Gujarat High Court's decision in Pr.CIT vs. Hitachi Home & Life Solution (I) Ltd. and the Hon'ble Supreme Court's decision in Rotork Controls India Pvt. Ltd. vs. CIT, which accepted the provision for warranty as revenue expenditure.The CIT(A) also noted that the assessee's provision for warranty expenses was calculated scientifically, based on a percentage of sales and historical data. The CIT(A) observed that the provision for the year under consideration was Rs.21,74,000/-, not the total disallowance of Rs.68,61,000/- made by the AO, which included Rs.46,87,000/- from previous years.The Tribunal found that the CIT(A) had correctly appreciated the facts and complied with the law as rendered by the Hon'ble Supreme Court and the Hon'ble Gujarat High Court. The Tribunal saw no reason to take a different view and declined to interfere with the CIT(A)'s order.Conclusion:The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs.68,61,000/- towards provision for warranty expenses, dismissing the Revenue's appeal. The Tribunal found that the provision was made on a scientific basis, consistent with past practices, and in accordance with legal precedents. Thus, the appeal of the Revenue was dismissed.